eye-in-the-sky-launching-a-geopolitical-risk-unit

May 2024 McKinsey Direct Eye in the sky: Launching a geopolitical risk unit A geopolitical risk unit can add perspective to navigate and identify opportunities in a fragmenting world. by Ziad Haider -- 1 of 4 -- In October 2023, amid a rise in global tension that has not been seen in a generation or more, intelligence leaders from Australia, Canada, New Zealand, the United Kingdom, and the United States, collectively known as the “Five Eyes,” gave an unprecedented joint interview.1 Together, the group delivered a message to Western multinational corporations: “You may not be interested in geopolitics, but geopolitics is interested in you.” They explained that in an era of major power and technological competition, businesses have an obligation to not only upgrade their understanding of geopolitics but also play better defense in securing their data and IP and reducing market overdependencies. Global businesses recognize the stakes. With ongoing wars in Europe and the Middle East, strategic competition in Asia, and a wave of global elections in 2024, business leaders now view geopolitics as their top risk according to a recent McKinsey Global Survey.2 Organizations can either preemptively adjust in a changing world or else react and have world events dictate the impact on them. Many are now acting by starting to systematically invest in their organizations’ capabilities to build what we call “geopolitical resilience”3 in three areas: — insight in securing sources of data to create an aligned and informed fact base for leadership around key geopolitical developments and trends — oversight in channeling these insights with board stewardship into frameworks to monitor, make decisions, and adjust an organization’s global posture,4 such as mapping and tiering both the controls needed and an organization’s geopolitical-risk exposure by markets — foresight to anticipate shocks and opportunities5 A recurring question, however, in conversations with boards and CEOs is how they should level up their insights and capabilities to guide them through the fog of geopolitics. Some organizations are now responding by standing up a dedicated unit to counsel their leadership on geopolitical risk and strategy. To be sure, geopolitical risk is not new. Many global organizations have long-standing capabilities to help them navigate such tensions across and within borders, including the following: — skill teams, which are legal, finance, security, and government affairs teams that also report to leadership at the business unit, regional, or global level — a vice chair, typically a former senior government official, who oversees the skill teams and externally engages on the company’s behalf to build the brand and tackle policy and regulatory challenges — an advisory council, a panel of experts with backgrounds spanning policy, media, and business, among other domains — external firms, which are advisory firms that provide services including market reporting, public-affairs support, scenario development, and engagement with regulators But for many leaders, these capabilities do not feel fully fit for purpose for two main reasons. First, the insights from internal skill teams are often left fragmented and team specific. For example, in seeking an integrated view of operating in a geopolitically 1 Brit McCandless Farmer, “More from the ‘Five Eyes’ intelligence chiefs’ warning to 60 Minutes,” CBS News, October 22, 2023. 2 “Geopolitical conflicts loom large,” McKinsey, January 16, 2024. 3 Andrew Grant, Ziad Haider, and Jean-Christophe Mieszala, “How to build geopolitical resilience amid a fragmenting global order,” McKinsey, September 8, 2022. 4 Ziad Haider, Jon Huntsman Jr., and Chris Leech, “Geopolitical resilience: The new board imperative,” McKinsey, August 8, 2023. 5 Andrew Grant, Ziad Haider, and Anke Raufuss, “Black swans, gray rhinos, and silver linings: Anticipating geopolitical risks (and openings),” McKinsey, February 24, 2023. 2 Eye in the sky: Launching a geopolitical risk unit -- 2 of 4 -- sensitive market, business leaders may find that the security team’s reporting on the risks posed to people in a market is not integrated with the finance group’s view on capital-control risk amid political volatility. Second, insights from external advisers can lack customization specific to the organization. This is understandable because members of an advisory council or firm can only walk so far in the shoes of a business leader. A corollary to this, then, is the question of impact (“What will we actually learn?”), which flows into cost considerations regarding retaining such firms. A geopolitical risk unit (GU) can help create four core capabilities as an organization’s “eye in the sky” in ways that mirror those of a satellite. This is ground control to Major Tom; you’ve really made the grade Just as a satellite scans the Earth for weather patterns by measuring reflected light and infrared temperatures, the GU can help provide global pattern recognition. It can help separate signal from noise amid the cacophony of geopolitical developments and zoom in on the risks that matter. In doing so, the GU should be empowered to coordinate insights across skill teams; develop regular analytical products and dashboards that outline markets, sectors, or products of exposure; and identify moves that the organization can make and that others are making, from which the GU can learn. Like the satellite-enabled GPS, a GU could also support the organization in navigating a changing global order. With business leaders crisscrossing the globe dealing with front-burner issues, a GU can help them step back and adopt a more strategic lens on not only global developments but also the organization’s global footprint in terms of where and how it operates and what risk and return trade-offs are involved. Like the interplay between a satellite and ground stations in routing telecommunications signals, a GU can help ensure that there’s a robust feedback loop with skill teams on the ground. To facilitate this feedback loop, organizations can consider standing up a working group across skill teams, which includes the GU, that convenes regularly to develop a granular picture of global events to support decision making; propel critical workstreams; and calibrate the knock-on effects of decisions made across the globe, as well as mitigants needed. Last, just as resources are needed to render a satellite effectively operable, so, too, will a GU benefit from being adequately resourced to engage external experts for insights, commission simulations, and deliver integrated country risk assessments for critical markets in close collaboration with the other skill teams. Can you hear me, Major Tom? “For here am I sitting in my tin can / Far above the world / Planet Earth is blue / And there’s nothing I can do” —David Bowie (“Space Oddity,” 1969) The primary challenge to prevent when establishing a GU is that of disconnect. A GU divorced from the operational realities that the organization confronts—whether overly academic in its analysis or unlinked from the skill teams—risks being adrift, ineffective, and an organizational “oddity.” Two ways to avoid that fate include sponsorship and adopting an embedded approach. Sponsorship involves organizations pairing the GU lead with a member of the board or leadership team who can provide strategic guidance on content and framing and ensure that briefings and products resonate with board and leadership team colleagues. An embedded approach is one in which, instead of being assigned to a stand-alone team, the GU is embedded in a skill team. Drawing on industry examples, this could be in the government affairs skill team of a tech firm, given the focus on regulation; the risk function at a financial institution focusing on credit and market risk; the strategy 3 Eye in the sky: Launching a geopolitical risk unit -- 3 of 4 -- team of an aerospace and defense company; or the security team at a firm with infrastructure and supply chain exposure. Apollo 8 astronaut William Anders once said, “We came all this way to discover the moon, and the most important thing is that we discovered the Earth.” It’s the same for an effective GU. For in holding up a telescope to a fragmenting global order for its organization, the GU can hold up a mirror to the organization so it can decide what kind of organization it wants to be and can afford to be. This introspection includes questions such as the following: — How should we engage our people on sensitive geopolitical matters? — How far should we pivot away from being a global entity in having to, for example, create separate tech standards across market? — Are we still truly a global firm in our ethos if not our operations, or do we now have to tilt toward a particular market given mounting expectations of corporate geopolitical responsibility? In short, a GU is more than just a source of insight. At its best, it imbues its organization’s leadership with a fresh strategic perspective on both its present and future: the ability to operate over an extended horizon. 4 Eye in the sky: Launching a geopolitical risk unit fiffffiflflffiflffi fiffffiflffiffiffffffi fiffffiflfl Designed by McKinsey Global Publishing Copyright © 2024 McKinsey & Company. All rights reserved. Ziad Haider is the global director of geopolitical risk and a partner in McKinsey’s Singapore office. This piece is adapted from remarks delivered to the Wall Street Journal Chief Compliance Officer Council summit in London on May 2, 2024. -- 4 of 4 --